Nassim Taleb sat for an interview with Tom Keene at the Bloomberg Invest conference. They showed the interview on Bloomberg TV on Thursday morning. There was a good bit of insight versus trying to scroll through his social media feeds where seems to spend most of his time belittling people.
Even though he's an asshole, there is still value to glean if you're willing to sift through the nonsense.
Two points in particular that stood out. One was a sort of risk happens fast analogy about markets taking the escalator up but take the elevator down. He believes that zero percent real yields for so long have created a generation of investment professionals that don't understand interest rates, so they didn't understand the potential for what happened last year in income markets contributing to a sort of Minsky moment in 2022, although he didn't use that term.
Predicting what something like interest rates will do is very difficult, more difficult than predicting the stock market which is itself very difficult. The only reason predicting the stock market is a little easier is because it has an up year 72% of the time.
So while predicting what interest rates will do is difficult, recognizing that interest rates were extremely low, pretty much unable to go lower and that there was more risk that reward in intermediate and long duration bonds was not difficult. We wrote about it endlessly on several different versions of this blog over the course of many years. Simple recognition and then avoidance of the area most at risk helped to sidestep most of that bond market carnage. Very coincidentally, I mentioned in yesterday's post an anecdote about an advisor who didn't understand any of this. The process for learning about risk is a lifelong pursuit as opposed to reading in a textbook what a P/E ratio is.
Taleb's other noteworthy point was about how non-market professionals engage with markets to accumulate sufficient funds for some future purpose, presumably retirement. First point is that he does not think the stock market will provide sufficient returns for the foreseeable future to help would be retirees build up enough money to live on. He said a butcher should focus on making money by selling meat not actively engaging the stock market with their work being a butcher as their secondary vocation. The implication was that the butcher would be better off for retirement by saving more and trading less.
Taking what you need and leaving what you don't, I take this as a point about letting the market's ergodicity do more work for you. Over some long period of time, stocks go up. The more trading you do, like what Jim Cramer talks about on TV, the more you are fighting that ergodicity.
Take someone who trades frenetically, all day long. In a year that equities are up 10%, will the frenetic trader do better than that? Let's say they do outperform that 10%, let's say they are up 15% in a 10% world. How much is that in dollars? For a $1 million portfolio, all of that work gets them an extra $50,000. Is your time worth more than that? Now factor in that there is no guarantee of outperforming with all of that trading. What if that same frenetic trader lags by 2%, they are up 8% in an up 10% world? Lagging a little is no big deal, it happens but that is a lot of time spent giving the market $20,000 back.
I don't believe in doing nothing, I am far from a passive investor but I do my best to let the natural tendency of markets going up work for me, I want to minimize the extent to which I push against that tendency. For the typical person, some sort of "normal" allocation to equities that allows them to avoid panic in downturns makes the most sense. There does need to be an understanding of personal tolerance for volatility though. If someone realizes their tolerance is low, then having 70% in equities is probably a bad idea.
Similar to risk above, the process for learning about ergodicity is a lifelong pursuit as opposed to reading in a textbook what a P/E ratio is.
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